February 26, 2020
The CBOE Equity put/call ratio is a reliable measure of investor sentiment. And like all sentiment indicators, it’s meant to be contrarian with high numbers reflecting increased bearishness from a highly emotional and levered investor class. The other highly emotional investor class are individual investors. Almost all of our readers are individual investors, but you’re ‘highly informed’ individuals (because you read Morning Notes), so no one should be offended ;-). The American Association of Individual Investors (AAII) conducts a weekly poll (due tomorrow), that has yet to show elevated bearish sentiment. At 0.80, the CBOE Equity put/call ratio now reflects elevated bearish sentiment. But sentiment indicators are generally useful only at ‘extremes.’ The record daily high for the CBOE Equity put/call ratio came on 12/21/18 at 1.13 with 50-day moving average of 0.71. The first daily spike to >0.80 occurred three months earlier with the 50-day moving average sitting at 0.61. The current 50-day moving average is 0.54. I’m not saying any of this needs to happen in order to call a bottom in the SPX. I’m only saying, a low based on extreme bearish sentiment isn’t likely to happen soon.